No-one can surely need to be told that the last few months have seen a modest improvement in the Middle Kingdom’s fortunes which has auspiciously coincided with the induction of the new leadership. In part, this was grounded on the usual year-end orgy of spending undisbursed government budgets, in part on the typical fourth quarter acceleration which took place in the money supply. This last quickened to a 34% annualized rate from the third quarter’s unchanged pace – impressive enough, perhaps, but still the slowest closing burst in four years. Furthermore, the volume of new loans granted – seemingly hamstrung by lacklustre deposit formation – touched a 3-year low, with the important medium- long term sub-category dipping to a 4-year nadir.

But if the banks were not officially in the game, the ‘shadow system’- including Xiao Gang’s Ponzi component - certainly came up trumps!

‘Total Social Financing’, as it is called (and less equity issuance), outstripped boring old bank loans by a factor or 1.7:1 in the final quarter of the year and constituted no less than 72% of all new credit extended in December. Compared with the same month in 2011, new, official, on-balance sheet bank loans declined 38% from CNY733 billion to CNY453 billion, while all other forms of credit rose 112% from CNY538 billion to CNY1, 139 billion.

Now some of this shift is probably not entirely a retrograde step, at least not to the extent that it represents a genuine entrepreneurial attempt to circumvent China’s antediluvian, financially repressed, SOE-favouring, bank-coddling regulatory framework and instead tries to put people’s savings to work at a suitable rate of interest, funding genuine productive undertakings.

The problem is that we also now some sizeable – if necessarily unquantifiable – fraction also comprises local government boondoggling, loan sharking, and outright fraud. No wonder the central authorities moved last week to clamp down on the activities of the lower tiers of government in this regard.

To put all of this in come kind of context, it looks as though every extra renminbi of incremental GDP in 2011 was ‘bought’ with around CNY1.76 in new credit: last year the ratio was 3:1. Capital efficiency, anyone?

Moreover, when we look at liquidity, matters become even more pressing. In 2011, the system was already pyramiding Y5.50 on top of every new Y1 of actual new money created (2.54:1 for the shadow component). Last year the overall ratio was 8.22:1 and the shadow one stretched to 3.87:1.

And what is all this moolah being used for? For moving away from a malinvestment-led graveyard of capital such as has been constructed over the past decade of SOE princeling dominance? It certainly doesn’t look like it.

‘Urbanization’ may be the new buzz word (and one about whose exact meaning we still maintain certain caveats), but this just means that instead of crushing returns at home and abroad (and piling up zombie loans on the books of the pliant state-owned banks) in such sectors as aluminium, steel, shipbuilding, photo-voltaic, etc., China now seems to wish to emulate post-bubble 1990s Japan with a whole host of non-paying propositions aimed at the domestic, rather than the international, market.

Take commercial real estate. Forced to cut back on their residential excesses, developers have been parlaying a good part of those new funds into building shopping malls wherever they can cut a deal with those paragons of municipal virtue, their buddies at the local land office. And, typically, they have not done things by halves for, as a recent press report made known, between now and 2015, if all goes according to schedule, China will add no less than 600 million square metres of mall floor space (around 120,000 football pitches’ worth).

For comparison the ICSC estimate of the existing stock of US shopping malls comes in at around 650 million, around half the nations’ overall retail area. Then there are the subways. All well and good in principal to reduce congestion, increase safety and convenience and lower logistic costs, but they are hardly going to pay even their maintenance charges, much less their construction costs if the present economics are anything to go by.

As the China Daily reported in what was - for the sensitive tenor of the times – an unusually critical article, doubts are already surfacing about the sustainability of the current programme.

Keen to spare the new bosses the loss of face of a soggy end to a soft year, in September, the NDRC suddenly approved 25 subway projects in 18 cities, for a total investment of more than CNY800 billion. Still furiously pump-priming, by November they had authorised four more cities — Beijing, Nanchang, Fuzhou, and Urumqi — to commit to plans requiring another CNY135 billion even though 35 cities had already broken ground on such projects in 2012, for an estimated ante of CNY260 billion, said the paper, citing a report of the Comprehensive Transport Research Institute of the commission.

Among the doubters, was one Wang Mengshu of the Chinese Academy of Engineering who told the interviewer that:- “A city is eligible to build subways only if it has an urban population of more than 3 million, an annual GDP that exceeds 100 billion yuan, and a local government budget higher than 10 billion yuan. In addition, the one-way traffic flow must reach 38,000 people at peak time, according to the National Development and Reform Commission…”

"However, some less developed cities in inland China have manipulated the figures to meet the requirement," he concluded

Quelle surprise!

One other thing to note is that, despite running a trade surplus of $235 billion and attracting FDI inflows of what will turn out to be around $95 billion over the 10 months since the last lunar holiday, the official count of foreign exchange reserve holdings shows zero net gain for the period.

Subtracting outward FDI of an estimated $70 billion (and noting that euro and sterling parities versus the US did not undergo any significant changes in the interim), that leaves a cool $260 billion unaccounted for.

No wonder the North American and Australasian press is rife with tales of Chinese visitors getting stopped at customs for not declaring $10s of 1000s of bills stuffed into their luggage, or of their less than discreet presence at housing auctions in their destination countries. All well and good, you may say, ifthe external surpluses are being recycled into the hands of private individuals, rather than being directed, via purchases of government securities, to the dead hand of the state, but it nonetheless speaks volumes about how the insiders view the prospects for wealth preservation, much less further capital gain, at home.

It is presumably on such grounds as these that Bernard Connolly recently compared present day China to 1830s America – an era your author dealt with in the fifth chapter of ‘Santayana’s Revenge’. Glancing back at what we wrote, we can see where the similarities lie: a vast orgy of infrastructure spending taking place in a wildly uncontrolled manner at the behest of eager local governments; a febrile property market in denationalized land; and rampant speculation in commodities – all financed by pliable, politically- controlled banks and their shadow market counterparts.